Question

The current asset section of the Excalibur Tire Company’s balance sheet consists of cash, marketable securities, accounts receivable, and inventories. The December 31, 2021, balance sheet revealed the following: Inventories $ 750,000 Total assets $ 2,800,000 Current ratio 2.3 Acid-test ratio 1.05 What amount should be included in the noncurrent asset section of Excalibur Tire’s December 31, 2021, balance sheet?

Answer 1

Abbreviations:

Current Assets = CA

Current Liabilities = CL

Inventory = Invent.

Liquid Assets = LA

Values Provided:

Current Ratio = 2.3 and Acid-Test Ratio = 1.05; Total Assets = $2,800,000; Inventory = $750,000

Now, Current Ratio = CA / CL

Or, 2.3 = CA / CL

Or, CL = CA / 2.3 --------Equation 1

Also, Acid-Test Ratio = LA / CL

Or, 1.05 = (CA – Invent.) / CL

Or, 1.05 = (CA - $750,000) / CL

Or, 1.05 x CL = CA - $750,000

Or, (1.05 x CA) / 2.3 = CA - $750,000 ------------- Replacing CL = CA / 2.3 ------Equation 1

Or, (1.25 x CA) / 2.3 = $750,000

Or, CA = ($750,000 X 2.3) / 1.25 = $1,380,000

Since Current Assets = $1,380,000, Non Current Assets will be

Total Assets – Current Assets = $2,800,000 - $1,380,000

= $1,420,000 (Answer.)